Wednesday, April 20, 2005
Big Four accounting firm KPMG settled the SEC civil fraud action related to its auditing work on behalf of Xerox Corp. in the late 1990s by agreeing to the entry of a cease-and-desist order, the payment of a civil penalty of $10 million, and to disgorge its fees from the Xerox engagement of $9.8 million plus interest -- a total payment of $22.475 million. The SEC's Litigation Release (here) describes KPMG's role in the Xerox accounting fraud:
[F]rom 1997 through 2000, KPMG permitted Xerox to manipulate its accounting practices to close a $3 billion "gap" between actual operating results and results reported to the investing public. During this period, Xerox used topside accounting actions at the end of financial reporting periods to increase equipment revenue and earnings through the improper acceleration of revenue from long term leases of Xerox copiers and through manipulation of excess or "cookie jar" reserves. Most of Xerox's topside accounting actions violated generally accepted accounting principles (GAAP) and all of them inflated and distorted Xerox's performance but were not disclosed to investors. These undisclosed actions overstated Xerox's true equipment revenues by at least $3 billion and overstated its true earnings by approximately $1.5 billion during the four-year period.
The SEC earlier settled its case with Xerox, with a similar $10 million civil penalty, and with six Xerox executives, including former CEO Paul Allaire, with total payments (penalties, disgorgement, and interest) of $22 million. The Commission also sued five former KPMG audit partners for their role in the Xerox accounting fraud, and that case continues (see Litigation Release here). KPMG ran afoul of the SEC last year in a settlement involving accounting at Gemstar-TV Guide International. (ph)